AP Econ – Review for 1^st Tests.

Questions 1-3 refer to the following chart.  The asterisks represent where each country is currently producing on their PPC.

 

                           CANNONLAND                                         WHITEWORLD

Food	Clothing	Food	Clothing
0	30	75	0
2	20	50*	20*
4*	10*	25	50
6	0	0	100

 

1.  What is the opportunity cost of Cannonland obtaining the first 2 units of food?

            ANSWER:  10 Units of clothing…remember, it’s what they gave up!

 

2.  Figure out the comparative advantage for each country making each good.  (Hint:  Set it up like the others in the usual grid!)

 

            ANSWER:  If you set up the grid it would look like:

 

                                                            Cannonland                Whiteworld

Food	6	75
Clothing	30	100

THIS IS AN OUTPUT PROBLEM so to figure out comparative advantage put what your NOT making over what you’re making.

 

Cannonland’s Opp Cost of food is 30/6 or 5.  Their opp cost of clothing is 6/30 or 1/5

Whiteworld’s opp. Cost of food is 100/75 or 4/3.  Their opp. Cost of clothing is 3/4

 

3.  Which of the following statements is true based on comparative advantage?

A.  Cannonland and Whiteworld should continue producing where they are and not trade.

B.  Cannonland should specialize in food and Whiteworld in clothing.

C.  Cannonland should specialize in clothing and Whiteworld in food.

D.  Cannonland has comparative advantage in clothing.

E.  Cannonland has absolute advantage in both goods.

 

            ANSWER:  C, Cannonland has comparative advantage in clothing (an Opp. Cost of 1/5 as opposed to Whiteworld’s ¾).  Did you set up your grid correctly?  This is an output problem!

 

4.  What would cause a Production Possibilities Curve to shift to the right?  To the left?

            ANSWER:  To move the PPC right, you would need an increase in resources OR technology.  To move it to the left there would be a decrease in resources.  In economics we generally don’t talk about countries getting worse with technology.

 

5.  Which of the following would be a scarce resource?  EXPLAIN.

            EDUCATION             GOLD             TIME

            ANSWER:  They are ALL scarce!  If education wasn’t scarce you wouldn’t have to pay to go to college.  There would be enough room and professors for everyone!  There would be no applications or anything.  The other two are pretty obvious.

 

6.  What is the relationship between scarcity and opportunity cost?

            ANSWER:  Because resources are scarce, you must make choices between things.  When you choose one item, whatever you didn’t choose is automatically your opportunity cost.

 

7.  What does it mean if a PPC curve is bowed outwards (concave)?

            ANSWER:  A PPC shows the trade-off between two goods.  If it is bowed outwards, it is demonstrating increasing opportunity costs.  The more of good X you make, the more of good Y you have to give up.

 

8.  What is economics?

            ANSWER:  The study of the choices people make to satisfy their wants and needs.  The science of scarcity.

 

9.   What is the difference between normative and positive economics?

            ANSWER:  Normative involves value judgements…positive economics are typically things that can be tested and measures.  “The government should lower taxes” is a normative statement.  “If the government lowered taxes, people would have more income to spend” is a positive statement.

 

10.  Trent works on an assembly line putting tires on cars.  He works for Tina, the boss, who has recently purchased some more rubber for the tires so Trent can continue working.  She has also hired some new workers who will start tomorrow.  Identify the land, labor, capital, and entrepreneur in this scenario. 

            ANSWER:  Land – rubber, Labor – Trent, Tina, and the new workers, Capital – the assembly line, Entrepreneur – Tina’s the closes thing we have.

 

11.  Japan trades technology (video games, cell phones, etc) to the United States for textiles (books, clothes, paper products) and both countries benefit.  Does it follow that ALL countries would benefit if they engaged in the same trade?  Why or why not?

            ANSWER:  NO.  This is the “fallacy of composition.”  Just because this trade is good for these countries, it may not be good for Brazil, for example.  Also, the reason this trade works is because they have comparative advantage in these goods.  This is not necessarily the case for other countries.

 

12.  What is the difference between the price and the cost of something?

            ANSWER:  The price of a good is just the monetary value (or in a barter economy the trading value) that you pay.  The cost of a good is the price, plus whatever it is you gave up to get that good.  If I pay $7 to go to the movies, that is the price.  The overall cost is the $7 plus the CD I can’t get with that money.

 

13.  Draw a PPC for Cannonland demonstrating that they could produce 300 cars OR 200 tractors.  Show this with a constant opportunity cost.

            ANSWER:  Cars

                              300

 

 

                                   

                                                             200     Tractors